Date created:22 January 2002
Last modified: 22 January 2002
Maintained by: John Quiggin
John Quiggin

The cost of doing nothing

Australian Financial Reviee

11 April 2002

Experienced debaters rarely commit themselves to an unambiguously false statement. So I was surprised to read Bjorn Lomborg's claim that 'the results of all major cost-benefit analyses show that doing Kyoto or something even grander is simply a bad investment for the world'. There are plenty of examples to prove him wrong.

Among the many economists whose work supports Kyoto is Jeffrey Frankel, a member of the Council of Economic Advisors under President Clinton. Frankel is cited by Lomborg for his work on economic growth, but his work on climate change is ignored. According to the modelling reported by Frankel, the costs of Kyoto would be about 0.1 per cent of GDP for developed countries. This is far below the range of $150 billion to $350 billion (0.6 to 1.5 per cent of GDP) cited by Lomborg.

Frankel is not alone. The Intergovernmental Panel on Climate Change cites a range of model estimates of the costs of implementing Kyoto using market mechanisms. They show that, with a global system of emission rights trading, the cost of implementing Kyoto would range from 0.1 per cent to 0.2 per cent of GDP.

Lomborg dismisses global emissions trading as politically infeasible because it would involve the redistribution of billions of dollars to developing countries (page 305). But then he turns around (page 318) and attacks alternative ways of implementing Kyoto by suggesting that the billions required could be better spent - by redistributing them to developing countries.

To put the cost estimates in context, 0.1 per cent of Australian GDP is about $600 million per year. The economic benefits generated by the Great Barrier Reef alone are more than this, but, like reefs around the world, it is already being affected by bleaching arising from rising water temperatures. Interestingly, Lomborg (page 4) promises to refute the claim that 'coral reefs are dying', but this issue is not mentioned in the chapter on global warming or, as far as I can see, anywhere else in the book.

Other economists argue that the benefits of doing 'something even grander' will exceed the costs. A recent paper entitled Climate Change:An Agenda for Global Collective Action, proposes a modified version of Kyoto which could achieve greater reductions in emissions while overcoming some political objections. One of the authors is Joseph Stiglitz, winner of the 2001 Nobel prize. Other notable supporters of action to mitigate global warming include Kenneth Arrow, William Cline and Paul Krugman. Lomborg gives 16 references to his preferred expert, William Nordhaus, but omits all these eminent economists.

Lomborg's estimates of the costs of mitigation are too high. However, the real problems in his book relate to the the costs of doing little or nothing, as he proposes.

Because the costs of doing nothing arise in the future, the weight that is placed on those costs depends critically on the rate of discount that is adopted. The real after-tax rate of interest on government bonds over the last 100 years has generally been between 1 and 3 per cent, but Lomborg assumes the rate is 5 per cent. The effect is to reduce the value of costs incurred in 50 years time by a factor of around 10, effectively disregarding the interests of future generations.

The most important problem with Lomborg's work is easier to understand. Lomborg claims to be an environmentalist. But in 70 pages on global warming, he says nothing about its effects on natural ecosystems. The IPCC report lists a wide range of ecological impacts on species extinction, coral reefs, wetlands and so on, which, taken together, show that climate change is the biggest single ecological problem faced by the world. For developed countries, the ecological costs of climate change will far outweigh direct economic impacts.

Most economists who have looked at the ecological costs of climate change conclude that, while they are almost impossible to evaluate in monetary terms, they are sufficient to justify substantial action. Lomborg ignores them completely.

Nordhaus, on whom Lomborg relies for all his modelling results, makes an admittedly 'speculative' estimate of the costs of ecological damage. This estimate is absurdly low - $5 billion a year for the entire US, including the economic costs of rising sea levels.

Of course, if you define a problem out of existence, as Lomborg and Nordhaus do, the optimal response is to do nothing. Lomborg is free to believe the most optimistic estimates on every environmental issue, and the most pessimistic estimates of the cost of doing anything. But he shouldn't call himself 'skeptical' or an 'environmentalist'.

Professor John Quiggin is a Senior Research Fellow of the Australian Research Council, based at the Australian National University and Queensland University of Technology.